A Little-Known Law Can Provide Relief During Covid-19 Crisis

Little-Known Law Can Help Employers Make Tax-Free Payments to Employees During the COVID-19 Pandemic


We are in the midst of an unprecedented time in our country as we navigate the uncertainty of the coronavirus pandemic.  Congress has recently passed several laws to provide relief from the economic effects of the pandemic to businesses and individuals.  Many employers are also trying to find ways to help their employees who are experiencing financial difficulties as a result of COVID-19.

In addition to the newly enacted laws, there is a little-known existing law that was passed during another extraordinary time in our country’s history that can help employers provide much-needed direct financial assistance to their employees on a tax-free basis.

Sec. 139 was added to the Internal Revenue Code in response to the terrorist attacks of September 11, 2001 to allow private entities to provide direct assistance payments to individuals.  These “qualified disaster relief payments” are tax-free for employees and are fully deductible by the employer.  Such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.

Under regular circumstances, any payment from an employer to an employee would be treated as compensation and taxed to the employee.  Sec. 139, however, provides an exception to this rule, but its use is reserved for “federally declared disasters”.  On March 13, 2020, President Trump issued an emergency declaration for the COVID-19 pandemic, which has activated the relief provisions of Sec. 139. The coronavirus pandemic will remain qualified until the President declares that the federally declared disaster condition has ended.

Some of the examples of payments that would qualify under Sec. 139 include the following:

  • Out-of-pocket medical costs related to COVID-19 (not covered by insurance)
  • Cost of over-the-counter medications
  • Costs to enable an employee to work from home during the pandemic, such as a computer, printer, or supplies.
  • Funeral costs of an employee or an employee’s family member

All employees of a company are eligible to receive payments under Sec. 139, regardless of their length of employment.

There is currently no requirement for an employer to have a formal written plan related to payments made under this provision.  However, we recommend that employers take steps to document their policy regarding these types of payments.  For example, consider documenting the types of expenses that can be reimbursed, any limitations on the amounts to be reimbursed, the time period for which reimbursements will be made, employee eligibility, etc.

If you would like to learn more about adopting a disaster relief plan and providing tax-free assistance to employees during the COVID-19 pandemic, please contact one of BRC’s tax advisors for more information.



Olga Oganesov Tax Principal, CPA

Olga is a Tax Principal, responsible for providing tax compliance and consulting services to a wide variety of clients. Since joining the firm in 2006, she has worked primarily with non-profit organizations and clients involved in the affordable housing industry, including tax credit properties, U.S. Department of Housing and Urban Development and U.S. Department […]